By Stanley M. Vasiliadis, Esquire, CELA

Many retirement and estate plans fail to adequately address issues relating to the risk of chronic incapacity. A “secure retirement” isn’t really secure if planning is not in place to ensure adequate funding for performance of personal care needs and everyday tasks in the event of chronic incapacity. What would $12,000 a month of unanticipated out-of- pocket costs for you or a family member, month-in, month-out, year-in, year-out do to your retirement plan? That’s what nursing homes cost. Medicare and health insurance DON’T PAY! Financial products alone are NOT ENOUGH! For all but the very wealthy, planning for possible future public benefits eligibility, particularly Medicaid, is an essential component of retirement and estate planning. The use of properly structured trusts form the cornerstone of such planning. This article describes such trusts and illustrates how they can be integrated as part of a properly structured estate and retirement plan.


What Is “Long-term Care” and Who Needs It?

“Long-term care” refers to a range of services and supports that might become necessary to meet personal care needs or assist with everyday tasks. Many seniors reach a point late in life where they need help with everyday tasks such as cooking, cleaning, driving, managing money, taking medication, using appliances and responding to emergencies, such as fire alarms. These tasks are referred to as “instrumental activities of daily living.” Family and friends might be available to provide some or all the needed help. But frequently, the need arises to bring in home health aides or to transfer to an assisted living facility. These services are not covered by Medicare or private health insurance – and they can cost a great deal. Chronic conditions typically become worse over time. For many, needed assistance with everyday tasks expands to include assistance with personal care needs, such as bathing, dressing, eating, ambulating (moving from place to place – walking), and using the toilet. Assistance with these “activities of daily living” most often occurs in a skilled nursing facility – nursing home – setting. So, who needs long-term care? According to the U.S. Department of Health and Human Services, 70% of people who reach age 65 will need some form of long-term care during their lives.


Financing Long-term Care

Nursing homes cost over $120,000 per year. Assisted living facilities typically cost over $50,000 per year. Unfortunately, Medicare and private health insurance DON’T PAY for such care. Some financial products, such as certain types of universal life insurance policies and whole life policies with accelerated death benefit riders, do afford assistance but are most often not enough. Consequently, for all but the very wealthy, prudent retirement and estate planning will incorporate public benefits eligibility, particularly planning measures to qualify for Medicaid benefits. Only Medicaid ensures full financial coverage for nursing home care for as long as needed and carries no time or dollar limits. Impoverishment is the price for admission into the Medicaid program. Fortunately, with proper planning, it’s possible to retain the beneficial use of assets and income and, if necessary, later qualify for Medicaid, receive essential care and preserve assets and income for spouse and family.


Using an Asset Protection Trust to Qualify for Medicaid

A “Trust” is an arrangement in which someone, a “settlor” (also called a “grantor”) transfers money or other assets to another, a “trustee,” who manages the assets and spends the money under written terms and conditions for the benefit of a specified person or persons, called a “beneficiary.” There are many different varieties of trusts that serve different and varied purposes. Those purposes are generally one or more of the following;

  • Management Assistance
  • Tax Avoidance
  • Creditor Protection
  • Probate Avoidance
  • Public Benefits Eligibility

A properly-structured Medicaid Asset Protection Trust can fulfill all of the above objectives. It can be structured as a joint trust for a married couple. So, for example, assume John and his wife, Mary, transfer their home and some of their investments to their son, Sam, who holds these assets for the benefit of his parents. John and Mary, in accordance with a use and occupancy agreement with Sam, continue to live in their home, rent-free, provided they also continue to pay for all the costs of maintaining the home, as before. They receive all the interest and dividends from the investments, and also rent and royalties, if any. The capital gains remain protected in the Trust, but are taxed to John and Mary on their federal income tax return rather than at a potentially higher Trust tax rate. The principal may not be distributed to them or used to pay any of their financial obligations. But they retain certain “strings” over the principal that in practical terms, provides them with indirect access to and control over the entire trust fund. John and Mary may not “revoke” the Trust. But their son, Sam, the Trustee, may “terminate” the Trust if it no longer remains beneficial to his parents. Alternatively, John and Mary may effectively terminate the Trust by directing Sam to transfer all the assets of the Trust to anyone they designate, except to themselves. Those persons receiving the trust fund do not incur income tax and, if trustworthy, will voluntarily transfer the assets back to John and Mary, again without adverse income tax consequences.


Income Tax Advantages

Because John and Mary retain “strings” over the trust principal in addition to receiving the Trust’s income, they are treated as owners of the entire trust fund under the Internal Revenue Code for purposes of federal income taxation. The Trust is classified under the tax code as a “grantor” trust. Grantor trust status is financially beneficial to a settlor and beneficiary unless the settlor’s estate is so large as to generate a federal estate tax upon the settlor’s demise. In 2017, each individual has a $5.49 million lifetime exclusion amount against federal gift and estate taxation, almost $11 million for a married couple. Grantor trust status is generally preferable to taxpayers who do not exceed this threshold.

In the case of our hypothetical couple, John and Mary, after both of them have passed away, the Trust will terminate and become distributable to the remainder beneficiaries, their children, Sam and Susie, in the same way that their other assets, outside the Trust will pass. But because this is a “grantor” trust, the remainder beneficiaries pay no federal income tax on the capital gains realized within the Trust. They receive these assets at a “stepped-up” basis. If John and Mary had gifted these assets outright to their children, Sam and Susie would be liable for payment of income taxes on the capital gain, at potentially staggering amounts.

As for their home, if John and Mary decide they want to move and sell their home, their son, Sam, the Trustee, will sell it and use the proceeds to buy a new home for his parents to occupy, same as before. Because the Trust enjoys “grantor” trust status, it will have the same $500,000 capital gains exclusion as would be available to John and Mary had they retained ownership of the home and not conveyed it in trust.


Creditor Protection

In most states, including Pennsylvania, someone cannot transfer assets into a trust, retain the right to use and benefit from the trust fund, and then also protect trust assets from the reach of creditors. But a properly structured Medicaid Asset Protection Trust will protect trust principal from the settlor’s creditors. That’s because the settlor retains no legal right to it. But as noted earlier, the settlor can gain access to the principal in multiple ways short of retaining legal authority to demand it. For example, John and Mary might decide to direct Sam to distribute $30,000 to Susie. Susie may do with this money as she wishes. That could include using the $30,000 gift to buy a new car for John and Mary.



Prudent retirement and estate planning takes into account the possibility of chronic incapacity as we age – i.e. long-term care planning. An essential component of long-term care planning for all but the very wealthy includes measures to qualify for Medicaid. A properly-structured Asset Protection Trust as described above constitutes an important tool. It enables you to retain beneficial use of assets in a tax-friendly manner, with protection from creditors, and ultimately to qualify for Medicaid benefits, if necessary, while preserving the financial security of loved ones. Trust in Trusts to protect you and your loved ones from the ruinous cost of long-term care.